Checks And Balances Should you outsource payroll?

Entrepreneur magazine, July 1997

Processing payroll is a critical function in any organization. But although you are probably quite knowledgeable in your own area of business, you may be overwhelmed by state and federal employment tax laws and other payroll issues. Should you try to figure it out or get someone else to handle it for you?

"If the task is not critical [to your business's mission], outsource it," says Phil Abbenante, sales training manager in the Salt Lake City office of Automatic Data Processing (ADP), an international payroll processing firm. "There's probably a service bureau that can handle it more efficiently and cost you less."

Unless you're a sole proprietorship or partnership with no employees, Abbenante advises considering a payroll service. Compare the cost of outsourcing to that of handling the chore in-house. When shopping for a payroll service, you should:

1. Check out the payroll service company's reputation. Ask for references, including current clients, accountants and bankers.

2. Ask about regulatory compliance. Good services will have brochures and other information indicating their knowledge of government regulations and requirements, such as the Electronic Federal Tax Payment System (EFTPS), and various state requirements--important if you have employees in more than one state.

3. Confirm the service's financial stability. Be sure the company can maintain up-to-date processing abilities and regulatory compliance.

4. Consider the various features and services available. In addition to calculating taxes and preparing checks, payroll services offer a wide range of services, including payroll deductions, direct deposit and automated time clocks, which collect data that is then fed electronically into the payroll system to calculate wages and provide additional labor reports.

You won't find a big difference in rates among payroll services in any given area. Fees are typically based on the number of employees and how often they're paid. "The more frequently you pay your people," Abbenante says, "the higher your service fees."

Instead of a service, you may want to consider purchasing a computer software package to handle payroll. For small operations, this may work. However, software companies generally cannot assist with technical payroll questions, and it will still be your responsibility to keep up with changing regulations.

If you sign up with a payroll service, Abbenante suggests shopping for a new one every three years. You may not need to switch, but it's a good idea to make sure you're still getting the best service for your needs.